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AICPA Released Questions from the

2016 Uniform CPA Exam
- Released April 2017 -

REGULATION

Uniform CPA Examination Questions and unofficial Answers, copyright by American Institute of Certified Public
Accountants, Inc. All rights reserved. Reprinted by Roger CPA Review with permission.
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2017 AICPA Released Questions – REG

2017 AICPA Released Regulation Questions

Please note: This document contains all the question information released by the AICPA. The table below each question contains
placement data for the question within the exam template from which the question comes. The “Key” value is the correct letter
answer for each preceding question.

MULTIPLE CHOICE - DIFFICULT

With respect to any given tax return, which of the following statements is correct?
A. More than one person may be deemed to be a preparer of a tax return.
B. The final reviewer of a tax return is automatically considered the preparer of the return.
C. Only one person may be deemed to be a preparer of a tax return.
D. The two individuals who have done the most work in preparing the return will be deemed to be
the only preparers.

Item ID: 70803

Key: A
REG.CSO.20170401: REG.001.001.002

A. Correct! Multiple individuals may be held responsible as the preparer for any one tax return.
Under Regulation §301.7701-15(a), a tax return preparer is defined as “any person who prepares for
compensation, or who employs one or more persons to prepare for compensation, all or a substantial
portion of any return of tax or any claim for refund of tax under the Internal Revenue Code (Code).” This
can include a signing preparer and any number of nonsigning preparers since Regulation §301.7701-
15(b)(3) provides that a single entry on a tax return could constitute a “substantial portion” of a return
depending on the size and complexity of the entry.

B. Incorrect. While a final reviewer, or “signing tax return preparer,” has the primary responsibility for
the overall substantive accuracy of the preparation of a return or claim for refund, other nonsigning
preparers may also be held responsible for the same return as a preparer.

C. Incorrect. Under Regulation §301.7701-15(a), a tax return preparer is defined as “any person who
prepares for compensation, or who employs one or more persons to prepare for compensation, all or a
substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code
(Code).”

D. Incorrect. Under Regulation §301.7701-15(a), a tax return preparer is defined as “any person who
prepares for compensation, or who employs one or more persons to prepare for compensation, all or a
substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code
(Code).” This can include a signing preparer and any number of nonsigning preparers since Regulation
§301.7701-15(b)(3) provides that a single entry on a tax return could constitute a “substantial portion” of a
return depending on the size and complexity of the entry.

Bloom’s skill level: Remembering & Understanding

Lecture # 9.01

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2017 AICPA Released Questions – REG

Which agency is responsible for determining the continuing professional education requirements for
licensed CPAs?
A. The Securities and Exchange Commission.
B. The board of accountancy for the state in which the licensed CPA practices.
C. The American Institute of Certified Public Accountants.
D. The National Association of State Boards of Accountancy.

Item ID: 69927

Key: B
REG.CSO.20170401: REG.001.002.000

A. Incorrect. The Securities and Exchange Commission (SEC) regulates the securities industry in
the United States. While the Public Company Accounting Oversight Board (PCAOB) was created by the
SEC and it regulates auditors of public companies subject to SEC oversight, they do not determine any
professional education requirements for CPAs.

B. Correct! Each state has a state board of accountancy that determines the continuing
professional education (CPE) requirements for the CPAs licensed in their state.

C. Incorrect. While the American Institute of Certified Public Accountants (AICPA) is a continuing
professional education (CPE) provider, it does not determine CPE requirements for licensed CPAs. A
CPA need not be a member of the AICPA to maintain a CPA license.

D. Incorrect. The National Association of State Boards of Accountancy (NASBA) is a supportive

organization that facilitates the state boards of accountancy, monitors the profession, provides leadership,
promotes the CPA license, etc. While NASBA provides standards for continuing professional education
(CPE) providers, it does not determine CPE requirements for individually licensed CPAs.

Bloom’s skill level: Remembering & Understanding

Lecture # 11.03

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2017 AICPA Released Questions – REG

A husband prepared his own tax return as married filing separately. His wife hired a CPA to prepare her
tax return as married filing separately and asked the CPA not to disclose the information to anyone. The
CPA was not retained by the husband for any tax work. The husband believed that his wife's tax return
was negligently prepared and that he was financially harmed. He hired an attorney, without his wife's
consent, to pursue a negligence claim against the CPA. The CPA hired an attorney to defend against the
negligence claim. To which party, if any, may the CPA disclose the wife's tax return information without
the wife's consent?
A. The husband, for the evaluation of the negligence claim.
B. The CPA's attorney, for the evaluation of the negligence claim.
C. The husband's attorney, for the evaluation of the negligence claim.
D. No one, because all disclosures must be made with the wife's consent.

Item ID: 83960

Key: B
REG.CSO.20170401: REG.001.004.002

A. Incorrect. Information obtained from a client by a tax preparer for the preparation of the client’s
tax return is confidential information that the tax preparer will generally incur a penalty for disclosing
without the client’s permission. There is no exception for disclosures made to a spouse where the CPA
was not retained to prepare both returns.

B. Correct! Information obtained from a client by a tax preparer for the preparation of the client’s
tax return is confidential information that the tax preparer will generally incur a penalty for disclosing
without the client’s permission; however, Regulation §301.7216-2(g) specifically provides that a preparer
may disclose tax return information to an attorney for purposes of securing legal advice.

C. Incorrect. Information obtained from a client by a tax preparer for the preparation of the client’s
tax return is confidential information that the tax preparer will generally incur a penalty for disclosing
without the client’s permission. There is no exception for disclosures made to a spouse’s attorney.

D. Incorrect. Although information obtained from a client by a tax preparer for the preparation of the
client’s tax return is confidential information that the tax preparer will generally incur a penalty for
disclosing without the client’s permission, the information may be disclosed without consent under certain
circumstances.

Bloom’s skill level: Application

Lecture # 9.01

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2017 AICPA Released Questions – REG

Which of the following duties is owed by a principal to an agent?

A. Accountability.
B. Performance.
C. Ratification.
D. Indemnification.

Item ID: 60871

Key: D
REG.CSO.20170401: REG.002.001.002

A. Incorrect. An agent has the duty of accountability to the principal. This is not generally a duty
owed by a principal to an agent.

B. Incorrect. Performance is the execution of a contract. This is not generally a duty owed by a
principal to an agent.

C. Incorrect. Ratification is the approval of an agreement entered into by an agent that lacked
authority to bind the principal legally. While a principal may ratify a contract that an agent entered on the
principal’s behalf without authority, the principal is not obligated to do so.

D. Correct! While a principal’s primary duty is to compensate an agent for services performed, the
principal also has the duty to indemnify, or reimburse, an agent for any expenses reasonably incurred on
the principal’s behalf.

Bloom’s skill level: Remembering & Understanding

Lecture # 18.01

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2017 AICPA Released Questions – REG

Which of the following statements is correct regarding the parol evidence rule?
A. It applies only in cases involving an oral contract.
B. It applies only to subsequent written modifications to a written contract.
C. It applies to subsequent oral agreements that contradict the terms of a final written agreement.
D. It applies to prior or contemporaneous oral agreements that contradict the terms of final written
agreements.

Item ID: 61569

Key: D
REG.CSO.20170401: REG.002.002.001

A. Incorrect. The parol evidence rule bars from court testimony any prior or contemporaneous oral or
written evidence that contradicts the final written contract.

B. Incorrect. The parol evidence rule bars from court testimony any prior or contemporaneous oral or
written evidence that contradicts the final written contract.

C. Incorrect. The parol evidence rule bars from court testimony any prior or contemporaneous oral or
written evidence that contradicts the final written contract.

D. Correct! The parol evidence rule bars from court testimony any prior or contemporaneous oral or
written evidence that contradicts the final written contract.

Bloom’s skill level: Remembering & Understanding

Lecture # 13.05

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2017 AICPA Released Questions – REG

Two individuals are planning to start a business and need advice on selecting the appropriate form of
entity. Their long-term business plan contemplates receiving future in-kind property distributions. Which of
the following is a pair of business entities each of which can make a distribution of appreciated property to
its owners that would not be taxable to the business entity or to its owners?
A. C corporation and a limited liability company.
B. Limited liability company and an S corporation.
C. S corporation and a general partnership.
D. General partnership and a limited liability partnership.

Item ID: 71801

Key: D
REG.CSO.20170401: REG.002.005.001

A. Incorrect. When a C corporation distributes property to a shareholder (sometimes referred to as

a dividend-in-kind), dividend income is generally recognized by the individual shareholder at the fair
market value (FMV) of the property received (i.e., assuming the entire amount represents a dividend and
not a return of capital). The corporation also must recognize a gain as if the property had been sold if the
FMV of the property exceeded its tax basis on the date of declaration. A limited liability company is, by
default, treated as either a disregarded entity or a partnership; therefore, property distributions are
generally not taxable. In the case of a partnership, the basis of the distributed asset can be no more than
the partner’s basis in the partnership before the distribution; thus, no gain would be recognized until the
property is subsequently sold.

B. Incorrect. A limited liability company is, by default, treated as either a disregarded entity or a
partnership; therefore, property distributions are generally not taxable. In the case of a partnership, the
basis of the distributed asset can be no more than the partner’s basis in the partnership before the
distribution; thus, no gain would be recognized until the property is subsequently sold. When an S
corporation distributes property to a shareholder, the distribution would be nontaxable to the extent of the
accumulated adjustments account (AAA); however, the S corporation must recognize a gain on
appreciated property as if it had been sold, similar to a C corporation. Any gain recognized by the S
corporation would be passed through to the shareholder’s tax return.

C. Incorrect. When an S corporation distributes property to a shareholder, the distribution would be

nontaxable to the extent of the accumulated adjustments account (AAA); however, the S corporation must
recognize a gain on appreciated property as if it had been sold, similar to a C corporation. Any gain
recognized by the S corporation would be passed through to the shareholder’s tax return. Property
distributions are generally not taxable to any type of partnership, nor are they taxable to the partners
receiving such distributions. Since the basis of the distributed asset can be no more than the partner’s
basis in the partnership before the distribution, no gain would be recognized until the property is
subsequently sold.

D. Correct! Property distributions are generally not taxable to any type of partnership, nor are they
taxable to the partners receiving such distributions. Since the basis of the distributed asset can be no
more than the partner’s basis in the partnership before the distribution, no gain would be recognized until
the property is subsequently sold.

Bloom’s skill level: Remembering & Understanding

Lecture # 4.05, 4.06. 2.11

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2017 AICPA Released Questions – REG

An individual taxpayer reported the following net long-term capital gains and losses:
Year Gain (loss)
1 ($5,000)
2 1,000
3 4,000

The amount of capital gain that the individual taxpayer should report in year 3 is
A. $0
B. $1,000
C. $3,000
D. $4,000

Item ID: 65475

Key: D
REG.CSO.20170401: REG.003.001.003

A. Incorrect. While a corporation would be able to carry forward enough of the capital loss to
eliminate the capital gain in year 3 (i.e., because it is not allowed to deduct capital losses against ordinary
income), an individual may deduct up to $3,000 of capital losses against ordinary income; thus, the
$5,000 carryforward should be used up before year 3.

B. Incorrect. An individual may deduct up to $3,000 of capital losses against ordinary income; thus,
the $5,000 carryforward should be used up before year 3.

C. Incorrect. An individual may deduct up to $3,000 of capital losses against ordinary income; thus,
the $5,000 carryforward should be used up in year 2.

D. Correct! Of the $5,000 loss in year 1, $3,000 will be claimed against ordinary income in year 1,
so $2,000 of the loss is carried forward to year 2. Since year 2 has a $1,000 gain, the net amount claimed
in year 2 will be a $1,000 loss (i.e., $1,000 gain – $2,000 loss carryforward) against ordinary income,
using up the loss carryforward; therefore, in year 3, the gain to be recognized will be the full $4,000.

Bloom’s skill level: Application

Lecture # 1.05

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2017 AICPA Released Questions – REG

A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price
allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization
deduction for the current year?
A. $3,000
B. $6,000
C. $8,000
D. $16,000

Item ID: 63357

Key: C
REG.CSO.20170401: REG.003.002.000

A. Incorrect. Since the calendar-year taxpayer purchased the new business on July 1, six months of
amortization will be allowed. The total intangibles to be amortized over 180 months includes the $100,000
customer list, the $50,000 trade name, and the $90,000 of goodwill, for a total of $240,000.

B. Incorrect. Since the calendar-year taxpayer purchased the new business on July 1, six months of
amortization will be allowed. The total intangibles to be amortized over 180 months includes the $100,000
customer list, the $50,000 trade name, and the $90,000 of goodwill, for a total of $240,000.

C. Correct! Since the calendar-year taxpayer purchased the new business on July 1, six months of
amortization will be allowed. The total intangibles to be amortized over 180 months includes the $100,000
customer list, the $50,000 trade name, and the $90,000 of goodwill, for a total of $240,000. Thus, the
current year’s amortization is $8,000, calculated as follows: $240,000/180 months × 6 months.

D. Incorrect. Since the calendar-year taxpayer purchased the new business on July 1, six months of
amortization will be allowed. The total intangibles to be amortized over 180 months includes the $100,000
customer list, the $50,000 trade name, and the $90,000 of goodwill, for a total of $240,000.

Bloom’s skill level: Application

Lecture # 6.02

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2017 AICPA Released Questions – REG

Parents lend $2,000,000 to their child to start a business. The loan is interest-free and is payable on
demand. The imputed interest is subject to
A. The gift tax only in the year the parents lend the money.
B. The generation-skipping transfer tax, but not the gift tax.
C. The gift tax each year the loan is outstanding.
D. An excise tax.

Item ID: 71129

Key: C
REG.CSO.20170401: REG.003.003.001

A. Incorrect. Under IRC §7872(a), the forgone interest on a below-market demand loan is treated as
if the lender transferred the amount to the borrower (i.e., as a gift in this case), who then retransferred the
amount back to the lender as interest generally on the last day of the calendar year. Thus, while the gift
tax would not apply to the loan itself (unless it is forgiven), the gift tax will apply to the amount of forgone
interest each year the loan is still outstanding.

B. Incorrect. The generation-skipping transfer tax would apply if the loan was made to a grandson
rather than the son of the lenders.

C. Correct! Under IRC §7872(a), the forgone interest on a below-market demand loan is treated as
if the lender transferred the amount to the borrower (i.e., as a gift in this case), who then retransferred the
amount back to the lender as interest generally on the last day of the calendar year. Thus, while the gift
tax would not apply to the loan itself (unless it is forgiven), the gift tax will apply to the amount of forgone
interest each year the loan is still outstanding.

D. Incorrect. Under IRC §7872(a), the forgone interest on a below-market demand loan is treated as
if the lender transferred the amount to the borrower (i.e., as a gift in this case), who then retransferred the
amount back to the lender as interest generally on the last day of the calendar year. Thus, while the gift
tax would not apply to the loan itself (unless it is forgiven), the gift tax will apply to the amount of forgone
interest each year the loan is still outstanding.

Bloom’s skill level: Remembering & Understanding

Lecture # 5.07

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2017 AICPA Released Questions – REG

Jensen reported the following items during the current year:

Fair rent value of a condominium owned by Jensen's employer $ 1,400
Cash found in a desk purchased for $30 at a flea market 400
Inheritance 11,000

The employer allowed Jensen to use the condominium for free in recognition of outstanding achievement.
Based on this information, what is Jensen's gross income for the year?
A. $ 1,400
B. $ 1,770
C. $ 1,800
D. $12,400

Item ID: 60735

Key: C
REG.CSO.20170401: REG.004.001.000

A. Incorrect. Regulation §1.61-1 provides that “Gross income means all income from whatever
source derived, unless excluded by law.” There is no exclusion for found money; if you keep it, it’s
taxable.

B. Incorrect. Regulation §1.61-14 provides that “Treasure trove, to the extent of its value in United
States currency, constitutes gross income for the taxable year in which it is reduced to undisputed
possession.” This means that there is no exclusion for found money; if you keep it, it’s taxable. The
amount found cannot be netted against the cost of the desk.

C. Correct! Regulation §1.61-1 provides that “Gross income means all income from whatever
source derived, unless excluded by law.” Inheritances are specifically excluded from the gross income of
the recipient under IRC §102. There is no exclusion for found money; if you keep it, it’s taxable. Only
certain tangible personal property awards from an employer for length of service or safety, as defined
under IRC §274(j), are excludable from gross income under IRC §74. Thus, Jensen’s gross income for
the year includes the $1,400 fair rental value of the condominium and the $400 found in the desk, for a
total of $1,800.

D. Incorrect. Regulation §1.61-1 provides that “Gross income means all income from whatever
source derived, unless excluded by law.” Inheritances are specifically excluded from the gross income of
the recipient under IRC §102. There is no exclusion for found money; if you keep it, it’s taxable.

Bloom’s skill level: Application

Lecture # 1.04

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2017 AICPA Released Questions – REG

Dr. Merry, a self-employed dentist, incurred the following expenses:

Investment expenses $ 700
Custodial fees related to Dr. Merry's Keogh plan 40
Work uniforms for Dr. Merry and Dr. Merry's employees 320
Subscriptions for periodicals used in the waiting room 110
Dental education seminar 1,300

What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or
Loss from Business?
A. $1,620
B. $1,730
C. $1,770
D. $2,430

Item ID: 60773

Key: B
REG.CSO.20170401: REG.004.003.000

A. Incorrect. Dr. Merry’s business deductions to be reported on Schedule C also include the
expense for the periodicals subscription cost ($110).

B. Correct! Dr. Merry’s business deductions to be reported on Schedule C include the expense for
uniforms ($320), the periodicals subscription cost ($110), and the dental education seminar ($1,300), for
a total of $1,730. The investment expenses of an individual are deductible as a miscellaneous itemized
deduction subject to the 2% of adjusted gross income floor on Schedule A. The custodial fees related to a
Keogh plan are generally not deductible unless contributions do not cover the fees.

C. Incorrect. The custodial fees related to a Keogh plan are generally not deductible unless
contributions do not cover the fees.

D. Incorrect. The investment expenses of an individual are deductible as a miscellaneous itemized

deduction subject to the 2% of adjusted gross income floor on Schedule A, not Schedule C. The custodial
fees related to a Keogh plan are generally not deductible unless contributions do not cover the fees.

Bloom’s skill level: Application

Lecture # 1.07

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2017 AICPA Released Questions – REG

The term active participation for a passive activity loss is relevant in relation to
A. Rental real estate activities.
B. Working interests in oil and gas properties.
C. Passive activities in which the taxpayer materially participates.
D. Passive activities in which the taxpayer does not materially participate.

Item ID: 72165

Key: A
REG.CSO.20170401: REG.004.004.000

A. Correct! The active participation rule applies to a taxpayer who doesn’t qualify as a “real estate
person” for purposes of deducting losses from rental real estate activities. If a taxpayer actively
participates in a rental activity (at least a 10% interest in the activity to be considered active), they may
deduct up to $25,000 of losses against ordinary income each year (with the remainder carried forward the
same as other unused passive losses).

B. Incorrect. The active participation rule applies to a taxpayer who doesn’t qualify as a “real estate
person” for purposes of deducting losses from rental real estate activities. If a taxpayer actively
participates in a rental activity (at least a 10% interest in the activity to be considered active), they may
deduct up to $25,000 of losses against ordinary income each year (with the remainder carried forward the
same as other unused passive losses).

C. Incorrect. The active participation rule applies to a taxpayer who doesn’t qualify as a “real estate
person” for purposes of deducting losses from rental real estate activities. If a taxpayer actively
participates in a rental activity (at least a 10% interest in the activity to be considered active), they may
deduct up to $25,000 of losses against ordinary income each year (with the remainder carried forward the
same as other unused passive losses).

D. Incorrect. The active participation rule applies to a taxpayer who doesn’t qualify as a “real estate
person” for purposes of deducting losses from rental real estate activities. If a taxpayer actively
participates in a rental activity (at least a 10% interest in the activity to be considered active), they may
deduct up to $25,000 of losses against ordinary income each year (with the remainder carried forward the
same as other unused passive losses).

Bloom’s skill level: Remembering & Understanding

Lecture # 1.07

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2017 AICPA Released Questions – REG

Anderson, a computer engineer, and spouse, who is unemployed, provide more than half of the support
for their child, age 23, who is a full-time student and who earns $7,000. They also provide more than half
of the support for their older child, age 33, who earns $2,000 during the year. How many exemptions may
the Andersons claim on their joint tax return?
A. One personal and two dependency.
B. One personal and one dependency.
C. Two personal and one dependency.
D. Two personal and two dependency.

Item ID: 62755

Key: D
REG.CSO.20170401: REG.004.006.000

A. Incorrect. Anderson is entitled to two personal exemptions, one for himself and one for his
spouse. He is also entitled to a dependency exemption for each of his children.

B. Incorrect. Anderson is entitled to two personal exemptions, one for himself and one for his
spouse. He is also entitled to a dependency exemption for each of his children. The 23-year-old qualifies
as a qualifying child since he/she is under the age of 24 and a full-time student. A qualifying child need
not meet the gross income test (i.e., it doesn’t matter that the child made more than the personal
exemption amount). Anderson’s 33-year-old child qualifies as a qualifying relative since Anderson
provides over half of the child’s support and the child did not earn more than the personal exemption
amount.

C. Incorrect. Anderson is entitled to two personal exemptions, one for himself and one for his
spouse. He is also entitled to a dependency exemption for each of his children. The 23-year-old qualifies
as a qualifying child since he/she is under the age of 24 and a full-time student. A qualifying child need
not meet the gross income test (i.e., it doesn’t matter that the child made more than the personal
exemption amount). Anderson’s 33-year-old child qualifies as a qualifying relative since Anderson
provides over half of the child’s support and the child did not earn more than the personal exemption
amount.

D. Correct! Anderson is entitled to two personal exemptions, one for himself and one for his spouse.
He is also entitled to a dependency exemption for each of his children. The 23-year-old qualifies as a
qualifying child since he/she is under the age of 24 and a full-time student. A qualifying child need not
meet the gross income test (i.e., it doesn’t matter that the child made more than the personal exemption
amount). Anderson’s 33-year-old child qualifies as a qualifying relative since Anderson provides over half
of the child’s support and the child did not earn more than the personal exemption amount.

Bloom’s skill level: Remembering & Understanding

Lecture # 1.12

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2017 AICPA Released Questions – REG

A C corporation had a federal income tax liability of $40,000 for each of the last five years, each covering
a 12-month period. The tax for the current year is $48,000. What is the lowest amount that must have
been paid as estimated taxes for the current year so that no penalty for underpayment is applicable?
A. $40,000
B. $44,000
C. $48,000
D. $52,800

Item ID: 63083

Key: A
REG.CSO.20170401: REG.005.003.001

A. Correct! In order to avoid an underpayment penalty under IRC §6655, a C corporation must
generally pay estimated taxes equal to the lesser of 100% of its prior year tax liability, or 100% of its
current year tax liability. Since 100% of the current year’s liability is $48,000 (i.e., greater than the prior
year liability), the requirement will be 100% of the prior year’s tax liability of $40,000. Note: The prior year
liability amount would not suffice to eliminate an underpayment penalty if the corporation had no tax
liability in the prior year, or had taxable income exceeding $1 million in any of the preceding 3 tax years.

B. Incorrect. In order to avoid an underpayment penalty under IRC §6655, a C corporation must
generally pay estimated taxes equal to the lesser of 100% of its prior year tax liability, or 100% of its
current year tax liability. Note: The prior year liability amount would not suffice to eliminate an
underpayment penalty if the corporation had no tax liability in the prior year, or had taxable income
exceeding $1 million in any of the preceding 3 tax years.

C. Incorrect. In order to avoid an underpayment penalty under IRC §6655, a C corporation must
generally pay estimated taxes equal to the lesser of 100% of its prior year tax liability, or 100% of its
current year tax liability. Note: The prior year liability amount would not suffice to eliminate an
underpayment penalty if the corporation had no tax liability in the prior year, or had taxable income
exceeding $1 million in any of the preceding 3 tax years.

D. Incorrect. In order to avoid an underpayment penalty under IRC §6655, a C corporation must
generally pay estimated taxes equal to the lesser of 100% of its prior year tax liability, or 100% of its
current year tax liability. Note: The prior year liability amount would not suffice to eliminate an
underpayment penalty if the corporation had no tax liability in the prior year, or had taxable income
exceeding $1 million in any of the preceding 3 tax years.

Bloom’s skill level: Application

Lecture # 2.09

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2017 AICPA Released Questions – REG

A corporation that intends to make an election to become an S corporation seeks advice. An accountant
would most appropriately make which of the following recommendations?
A. Limit the number of shareholders to 120 unrelated individuals.
B. Limit the issuance of stock to common and preferred.
C. Ensure that no shareholders are resident aliens.
D. Evaluate the eligibility of all shareholders.

Item ID: 61283

Key: D
REG.CSO.20170401: REG.005.004.001

A. Incorrect. The number of shareholders is limited to 100 unrelated individuals.

B. Incorrect. The issuance of stock is limited to one class of stock—common stock.

C. Incorrect. All shareholders must be either residents or citizens of the United States.

D. Correct! As there are several restrictions as to who can be a shareholder of an S corporation, it

would be appropriate to advise a client to that seeks an S election to evaluate the eligibility of all
shareholders. The number of shareholders is limited to 100 unrelated individuals. The issuance of stock is
limited to one class of stock—common stock. All shareholders must be either residents or citizens of the
United States.

Bloom’s skill level: Remembering & Understanding

Lecture # 3.01

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2017 AICPA Released Questions – REG

A taxpayer owns 50% of the stock of an S corporation and materially participated in the corporation's
activities. At the beginning of the year, the taxpayer had an adjusted basis in the stock of $25,000 and
made a loan to the corporation of $13,000. During the year, $3,000 of the loan was repaid, and the
taxpayer's share of the corporation's loss for the year was $40,000. What is the amount of the loss that
may be deducted on the taxpayer's tax return?
A. $25,000
B. $35,000
C. $38,000
D. $40,000

Item ID: 72699

Key: B
REG.CSO.20170401: REG.005.004.002

A. Incorrect. S corporation shareholders must track their stock basis and their debt basis separately,
so the taxpayer in this question starts with a stock basis of $25,000 and a debt basis of $13,000 for the
amount loaned to the S corporation. Since $3,000 of the loan is repaid during the year, the taxpayer’s
debt basis is reduced to $10,000. This leaves a total of $35,000 ($25,000 stock basis + $10,000 debt
basis) of basis to absorb part of the loss for the year; that is, the loss is deductible to the extent of the
shareholder’s combined bases as of the end of the year, so the taxpayer’s bases will both be reduced to
zero, leaving a $5,000 loss suspended until the shareholder’s basis is increased enough to absorb the
loss.

B. Correct! S corporation shareholders must track their stock basis and their debt basis separately,
so the taxpayer in this question starts with a stock basis of $25,000 and a debt basis of $13,000 for the
amount loaned to the S corporation. Since $3,000 of the loan is repaid during the year, the taxpayer’s
debt basis is reduced to $10,000. This leaves a total of $35,000 ($25,000 stock basis + $10,000 debt
basis) of basis to absorb part of the loss for the year; that is, the loss is deductible to the extent of the
shareholder’s combined bases as of the end of the year, so the taxpayer’s bases will both be reduced to
zero, allowing $35,000 to be deducted and leaving a $5,000 loss suspended until the shareholder’s basis
is increased enough to absorb the loss.

C. Incorrect. S corporation shareholders must track their stock basis and their debt basis separately,
so the taxpayer in this question starts with a stock basis of $25,000 and a debt basis of $13,000 for the
amount loaned to the S corporation. Since $3,000 of the loan is repaid during the year, the taxpayer’s
debt basis is reduced to $10,000. This leaves a total of $35,000 ($25,000 stock basis + $10,000 debt
basis) of basis to absorb part of the loss for the year; that is, the loss is deductible to the extent of the
shareholder’s combined bases as of the end of the year, so the taxpayer’s bases will both be reduced to
zero, leaving a $5,000 loss suspended until the shareholder’s basis is increased enough to absorb the
loss.

D. Incorrect. S corporation shareholders must track their stock basis and their debt basis separately,
so the taxpayer in this question starts with a stock basis of $25,000 and a debt basis of $13,000 for the
amount loaned to the S corporation. Since $3,000 of the loan is repaid during the year, the taxpayer’s
debt basis is reduced to $10,000. This leaves a total of $35,000 ($25,000 stock basis + $10,000 debt
basis) of basis to absorb part of the loss for the year; that is, the loss is deductible to the extent of the
shareholder’s combined bases as of the end of the year, so the taxpayer’s bases will both be reduced to
zero, leaving a $5,000 loss suspended until the shareholder’s basis is increased enough to absorb the
loss.

18
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2017 AICPA Released Questions – REG

Partnership P has an operating loss of $10,000 for the year. Partner A had a 50% interest in the
partnership, with a basis of $5,000 at the beginning of the year. P distributed $2,000 to A during the year.
What amount of loss is deductible by A?
A. $2,000
B. $3,000
C. $5,000
D. $7,000

Item ID: 62631

Key: B
REG.CSO.20170401: REG.005.005.001

A. Incorrect. Since Partner A had a 50% interest in the partnership, A’s share in the loss is $5,000.
With a basis of $5,000 at the beginning of the year and a distribution of $2,000 to A during the year, there
is $3,000 of basis left to absorb part of the loss. The remaining $2,000 will be suspended until the partner
has sufficient basis to absorb the loss.

B. Correct! Since Partner A had a 50% interest in the partnership, A’s share in the loss is $5,000.
With a basis of $5,000 at the beginning of the year and a distribution of $2,000 to A during the year, there
is $3,000 of basis left to absorb part of the loss; thus, $3,000 of the loss will be deductible, the partner’s
basis will be reduced to zero, and the remaining $2,000 loss will be suspended until the partner has
sufficient basis to absorb the loss.

C. Incorrect. Since Partner A had a 50% interest in the partnership, A’s share in the loss is $5,000.
With a basis of $5,000 at the beginning of the year and a distribution of $2,000 to A during the year, there
is $3,000 of basis left to absorb part of the loss. The remaining $2,000 will be suspended until the partner
has sufficient basis to absorb the loss.

D. Incorrect. Since Partner A had a 50% interest in the partnership, A’s share in the loss is $5,000.
With a basis of $5,000 at the beginning of the year and a distribution of $2,000 to A during the year, there
is $3,000 of basis left to absorb part of the loss. The remaining $2,000 will be suspended until the partner
has sufficient basis to absorb the loss.

Bloom’s skill level: Application

Lecture # 4.02

20
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2017 AICPA Released Questions – REG

A partner received a partnership interest with a fair market value (FMV) of $55,000 in exchange for the
following items:
Basis FMV
Cash $20,000 $20,000
Property 10,000 30,000
Services rendered 0 5,000

What is the partner's basis in the partnership interest?

A. $55,000
B. $50,000
C. $35,000
D. $30,000

Item ID: 63011

Key: C
REG.CSO.20170401: REG.005.005.002

A. Incorrect. A partner’s basis in his/her partnership interest will be equal to the basis of the money
and/or property contributed to the partnership (less liability relief), plus any income recognized on the
contribution of services.

B. Incorrect. A partner’s basis in his/her partnership interest will be equal to the basis of the money
and/or property contributed to the partnership (less liability relief), plus any income recognized on the
contribution of services. When a partner contributes services, he/she must recognize ordinary income in
the amount of the fair market value (FMV) of the interest received (i.e., generally the FMV of the services
rendered).

C. Correct! A partner’s basis in his/her partnership interest will be equal to the basis of the money
and/or property contributed to the partnership (less liability relief), plus any income recognized on the
contribution of services. When a partner contributes services, he/she must recognize ordinary income in
the amount of the fair market value (FMV) of the interest received (i.e., generally the FMV of the services
rendered); thus, the partner’s basis in the partnership interest is $20,000 cash + $10,000 basis in property
+ $5,000 FMV of services = $35,000.

D. Incorrect. A partner’s basis in his/her partnership interest will be equal to the basis of the money
and/or property contributed to the partnership (less liability relief), plus any income recognized on the
contribution of services. When a partner contributes services, he/she must recognize ordinary income in
the amount of the fair market value (FMV) of the interest received (i.e., generally the FMV of the services
rendered).

Bloom’s skill level: Application

Lecture # 4.02

21
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2017 AICPA Released Questions – REG

At the close of the prior year, an individual taxpayer transferred assets into an irrevocable trust, retaining
the right to the income from the trust for life. During the year, the assets earned ordinary dividends and
interest income. The tax liability on the income earned will be paid
A. Entirely by the trust.
B. Entirely by the individual taxpayer.
C By the trust on the interest income only, and by the individual taxpayer for the dividend income.
D. By the trust on the dividend income only, and by the individual taxpayer for the interest income.

Item ID: 68073

Key: B
REG.CSO.20170401: REG.005.007.002

A. Incorrect. Since the grantor of the trust retained the right to the income from the trust for life, the
grantor will be treated as the owner of that portion of the trust under IRC §677; thus, both the ordinary
dividends and the interest income will be taxed to the grantor under IRC §671.

B. Correct! Since the grantor of the trust retained the right to the income from the trust for life, the
grantor will be treated as the owner of that portion of the trust under IRC §677; thus, both the ordinary
dividends and the interest income will be taxed to the grantor under IRC §671.

C. Incorrect. Since the grantor of the trust retained the right to the income from the trust for life, the
grantor will be treated as the owner of that portion of the trust under IRC §677; thus, both the ordinary
dividends and the interest income will be taxed to the grantor under IRC §671.

D. Incorrect. Since the grantor of the trust retained the right to the income from the trust for life, the
grantor will be treated as the owner of that portion of the trust under IRC §677; thus, both the ordinary
dividends and the interest income will be taxed to the grantor under IRC §671.

Bloom’s skill level: Remembering & Understanding

Lecture # 5.05

22
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2017 AICPA Released Questions – REG

Which of the following types of business may not qualify for a 501(c)(3) exemption from federal income
taxes?
A. A foundation.
B. A fund.
C. A corporation.
D. A partnership.

Item ID: 72967

Key: D
REG.CSO.20170401: REG.005.008.001

A. Incorrect. IRC §501(c)(3) includes “Corporations, and any community chest, fund, or foundation,
organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international amateur sports competition …, or for the
prevention of cruelty to children or animals….”

B. Incorrect. IRC §501(c)(3) includes “Corporations, and any community chest, fund, or foundation,
organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international amateur sports competition …, or for the
prevention of cruelty to children or animals….”

C. Incorrect. IRC §501(c)(3) includes “Corporations, and any community chest, fund, or foundation,
organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international amateur sports competition …, or for the
prevention of cruelty to children or animals….”

D. Correct! IRC §501(c)(3) includes “Corporations, and any community chest, fund, or
foundation, organized and operated exclusively for religious, charitable, scientific, testing for public
safety, literary, or educational purposes, or to foster national or international amateur sports competition
…, or for the prevention of cruelty to children or animals…”; thus, a partnership would not qualify.

Bloom’s skill level: Remembering & Understanding

Lecture # 8.01

23
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2017 AICPA Released Questions – REG

MULTIPLE CHOICE – MEDIUM

While reviewing a new client's prior-year tax returns, a CPA became aware that the client did not properly
file all required federal income tax returns. Under Treasury Circular 230, what should the CPA do in this
situation?
A. Notify the AICPA of the situation and request a ruling of continuance.
B. Notify the Internal Revenue Service of the client's noncompliance.
C. Resign from the engagement.
D. Advise the client of the consequences of the noncompliance.

Item ID: 65737

Key: D
REG.CSO.20170401: REG.001.001.001

A. Incorrect. Section 10.21 of Circular 230 provides that a practitioner who becomes aware of a
client’s noncompliance with revenues laws or an error or omission in a filing with the IRS, the practitioner
is required to promptly advise the client of the circumstance and the potential consequences. Information
obtained from a client in connection with the preparation of their tax return is confidential, and the
preparer is not permitted to reveal this information to third parties without the consent of the taxpayer,
except in limited circumstances: (1) to respond to a valid government order; (2) as part of a quality control
peer review program, or (3) to permit the electronic preparation or submission of the taxpayer’s return.

B. Incorrect. Section 10.21 of Circular 230 provides that a practitioner who becomes aware of a
client’s noncompliance with revenues laws or an error or omission in a filing with the IRS, the practitioner
is required to promptly advise the client of the circumstance and the potential consequences. Information
obtained from a client in connection with the preparation of their tax return is confidential, and the
preparer is not permitted to reveal this information to third parties without the consent of the taxpayer,
except in limited circumstances: (1) to respond to a valid government order; (2) as part of a quality control
peer review program, or (3) to permit the electronic preparation or submission of the taxpayer’s return.

C. Incorrect. Section 10.21 of Circular 230 provides that a practitioner who becomes aware of a
client’s noncompliance with revenues laws or an error or omission in a filing with the IRS, the practitioner
is required to promptly advise the client of the circumstance and the potential consequences. A CPA is
not obligated to resign from the engagement, but there is an obligation to promptly inform the client upon
becoming aware of such a circumstance.

D. Correct! Section 10.21 of Circular 230 provides that a practitioner who becomes aware of a
client’s noncompliance with revenues laws or an error or omission in a filing with the IRS, the practitioner
is required to promptly advise the client of the circumstance and the potential consequences.

Bloom’s skill level: Remembering & Understanding

Lecture # 11.02

24
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2017 AICPA Released Questions – REG

A tax preparer filed a return for a taxpayer and used the taxpayer's detailed check register containing both
business and personal expenses. If the tax preparer knowingly included personal expenses as deductible
business expenses on the taxpayer's business, then the
A. Tax preparer will be liable only for penalties for taking an unreasonable position that led to an
understatement.
B. Taxpayer will be liable for penalties for taking an unreasonable position that led to an
understatement.
C. Tax preparer will be liable for penalties arising from an understatement due to willful or reckless
conduct.
D. Taxpayer will be liable for penalties attributable to transactions lacking economic substance.

Item ID: 66567

Key: C
REG.CSO.20170401: REG.001.001.002

A. Incorrect. While preparers are subject to penalty under IRC §6694(a) for taking an “unreasonable
position,” knowingly including personal expenses as deductible business expenses constitutes “willful or
reckless conduct,” which is subject to a more onerous penalty.

B. Incorrect. Penalties are assessed against preparers who knowingly or recklessly understate the
tax liability of a client. Knowingly including personal expenses as deductible business expenses
constitutes “willful or reckless conduct.”

C. Correct! Knowingly including personal expenses as deductible business expenses constitutes

“willful or reckless conduct.” Under IRC §6694(b), a tax preparer who prepares a return or claim for refund
in which he/she either (1) willfully attempts to understate the tax liability, or (2) recklessly or intentionally
disregards rules or regulations, is subject to a penalty equal to the greater of $5,000 or 75% of the income
derived from the return or claim.

D. Incorrect. While a taxpayer is subject to a penalty under IRC §6662 for understatements
attributed to transactions lacking economic substance, knowingly including personal expenses as
deductible business expenses constitutes “willful or reckless conduct.” Penalties are assessed against
preparers who knowingly or recklessly understate the tax liability of a client.

Bloom’s skill level: Application

Lecture # 9.01

25
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2017 AICPA Released Questions – REG

To whom must a CPA pay license fees in order to maintain a CPA license?
A. The Public Company Accounting Oversight Board.
B. The American Institute of Certified Public Accountants.
C. The state board of accountancy of the CPA's state of licensure.
D. The state society of certified public accountants of the CPA's state of licensure.

Item ID: 71541

Key: C
REG.CSO.20170401: REG.001.002.000

A. Incorrect. Each state has a state board of accountancy that issues licenses to engage in the
practice of public accounting. The PCAOB regulates auditors of public companies subject to SEC
oversight.

B. Incorrect. Each state has a state board of accountancy that issues licenses to engage in the
practice of public accounting. A CPA need not be a member of the AICPA to maintain a CPA license.

C. Correct! Each state has a state board of accountancy that issues licenses to engage in the
practice of public accounting. Each state board of accountancy establishes requirements that must be
met in order to maintain the license, including fees and CPE.

D. Incorrect. Each state has a state board of accountancy that issues licenses to engage in the
practice of public accounting. A CPA need not be a member of his/her state society of certified public
accountants to maintain a CPA license.

Bloom’s skill level: Remembering & Understanding

Lecture # 11.03

26
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2017 AICPA Released Questions – REG

Smith entered an oral agreement hiring and authorizing Jones to sell fraudulent identification cards
produced by Smith. Smith and Jones orally agreed to share the proceeds from their enterprise. Later,
Jones claimed that no enforceable agency relationship was created. Jones is correct because
A. Jones did not have authority.
B. Jones did not have contractual capacity.
C. The purpose of the agency was contrary to public policy.
D. The agreement was a partnership.

Item ID: 60641

Key: C
REG.CSO.20170401: REG.002.001.001

A. Incorrect. The courts will not enforce any agreement to violate the law or public policy. Such
contracts are void and cannot be enforced by either party.

B. Incorrect. The courts will not enforce any agreement to violate the law or public policy. Such
contracts are void and cannot be enforced by either party.

C. Correct! The courts will not enforce any agreement to violate the law or public policy. Such
contracts are void and cannot be enforced by either party.

D. Incorrect. The courts will not enforce any agreement to violate the law or public policy. Such
contracts are void and cannot be enforced by either party.

Bloom’s skill level: Remembering & Understanding

Lecture # 13.04

27
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2017 AICPA Released Questions – REG

Dunlap contracted to work exclusively for Foster during June for $5,000. On May 31, Foster canceled the
contract. Dunlap found another job during June for $3,000. Dunlap filed suit against Foster for breach of
contract. Dunlap should recover what amount of compensatory damages?
A. $8,000
B. $5,000
C. $3,000
D. $2,000

Item ID: 61515

Key: D
REG.CSO.20170401: REG.002.002.003

A. Incorrect. When a party indicates in advance that they will not perform on the contract, this is
known as anticipatory breach. The victim of anticipatory breach must take reasonable action to minimize
the damages, and cannot recover damages they could have reasonably avoided.

B. Incorrect. When a party indicates in advance that they will not perform on the contract, this is
known as anticipatory breach. The victim of anticipatory breach must take reasonable action to minimize
the damages, and cannot recover damages they could have reasonably avoided.

C. Incorrect. When a party indicates in advance that they will not perform on the contract, this is
known as anticipatory breach. The victim of anticipatory breach must take reasonable action to minimize
the damages, and cannot recover damages they could have reasonably avoided.

D. Correct! When a party indicates in advance that they will not perform on the contract, this is
known as anticipatory breach. The victim of anticipatory breach must take reasonable action to minimize
the damages, and cannot recover damages they could have reasonably avoided; thus, Dunlap should be
able to recover compensatory damages for the additional $2,000 that he would have received under the
original contract had Foster not breached the contract.

Bloom’s skill level: Application

Lecture # 13.05

28
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2017 AICPA Released Questions – REG

ABC Co. loaned XYZ Co. $5,000. Under the Secured Transactions Article of the UCC, which of the
following items would give ABC the best position in the event of default on the loan by XYZ?
A. A signed security interest not filed.
B. A financing statement.
C. Common stock promised as collateral for the loan.
D. Possession of XYZ's service truck as collateral.

Item ID: 64747

Key: D
REG.CSO.20170401: REG.002.003.003

A. Incorrect. While a signed security interest will make the agreement effective between ABC and
XYZ, it does not protect ABC’s interest from third parties since it is not filed.

B. Incorrect. While a financing statement would perfect the security interest against third parties,
there is a better position for ABC in the event of a default by XYZ.

C. Incorrect. Possession is required to perfect a security interest in common stock as collateral. A

mere promise is unenforceable.

D. Correct! Possession of XYZ's service truck as collateral is the best position for ABC, since
possession perfects the security interest against third parties and there are no loopholes to a perfection
by possession (assuming there are no creditors who have already perfected their security interest by filing
a financing statement).

Bloom’s skill level: Application

Lecture # 19.02

29
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2017 AICPA Released Questions – REG

A married couple abandoned their principal residence in May. They had purchased the house five years
ago for $350,000. The house had a current fair market value of $300,000. What is the maximum loss, if
any, that they are allowed to deduct on the current-year's tax return for the abandoned property?
A. $0
B. $50,000
C. $300,000
D. $350,000

Item ID: 71841

Key: A
REG.CSO.20170401: REG.003.001.002

A. Correct! Losses on the abandonment of personal-use assets by an individual are not deductible.
IRC §165(c) provides that the deduction of losses by an individual are generally limited to (1) losses
incurred in a trade or business; (2) losses incurred in a transaction entered into for profit; and (3) losses of
property arising by casualty or theft.

B. Incorrect. IRC §165(c) provides that the deduction of losses by an individual are generally limited
to (1) losses incurred in a trade or business; (2) losses incurred in a transaction entered into for profit; and
(3) losses of property arising by casualty or theft.

C. Incorrect. IRC §165(c) provides that the deduction of losses by an individual are generally limited
to (1) losses incurred in a trade or business; (2) losses incurred in a transaction entered into for profit; and
(3) losses of property arising by casualty or theft.

D. Incorrect. IRC §165(c) provides that the deduction of losses by an individual are generally limited
to (1) losses incurred in a trade or business; (2) losses incurred in a transaction entered into for profit; and
(3) losses of property arising by casualty or theft.

Bloom’s skill level: Application

Lecture # 1.05

30
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2017 AICPA Released Questions – REG

Lobster, Inc. purchased the following assets during year 1:

Computers $ 35,000
Computer desks 22,000
Office furniture 4,000
Delivery trucks 25,000
Building 425,000

What should be reported as the cost basis for MACRS seven-year property?
A. $ 26,000
B. $ 86,000
C. $451,000
D. $511,000

Item ID: 64591

Key: A
REG.CSO.20170401: REG.003.002.000

A. Correct! MACRS seven-year property includes the computer desks ($22,000) and the office
furniture ($4,000), for a total of $26,000. Computers and delivery trucks are five-year property, and the
building is nonresidential real property, which is depreciated over 39 years.

B. Incorrect. Computers and delivery trucks are five-year property.

C. Incorrect. Computers and delivery trucks are five-year property, and the building is nonresidential
real property, which is depreciated over 39 years.

D. Incorrect. Computers and delivery trucks are five-year property, and the building is nonresidential
real property, which is depreciated over 39 years.

Bloom’s skill level: Application

Lecture # 6.01

31
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2017 AICPA Released Questions – REG

This year, Beck gave $5,000 cash to a nephew, canceled $3,000 of the same nephew's indebtedness,
donated $1,500 to a political party, and gave $1,200 of municipal bonds to a parent. What is the amount
of Beck's gifts before considering the gift tax annual exclusion?
A. $5,000
B. $8,000
C. $9,200
D. $10,700

Item ID: 63441

Key: C
REG.CSO.20170401: REG.003.003.002

A. Incorrect. Beck’s gifts include the $5,000 cash to the nephew, the $3,000 of canceled debt, and
the $1,200 of municipal bonds given to a parent. Since Beck gifted $5,000 to the same nephew and the
question does not state otherwise, one must assume that the $3,000 of debt was canceled as a gift as
well. It does not matter that the municipal bonds are tax-exempt; it is still considered a gift worth $1,200.

B. Incorrect. Beck’s gifts include the $5,000 cash to the nephew, the $3,000 of canceled debt, and
the $1,200 of municipal bonds given to a parent. It does not matter that the municipal bonds are tax-
exempt; it is still considered a gift worth $1,200.

C. Correct! Beck’s gifts include the $5,000 cash to the nephew, the $3,000 of canceled debt, and
the $1,200 of municipal bonds given to a parent, for a total of $9,200. IRC §2501(a)(4) excludes transfers
to political organizations from the definition of a “taxable transfer” for gift tax purposes; thus, the $1,500
political donation is not considered a gift.

D. Incorrect. IRC §2501(a)(4) excludes transfers to political organizations from the definition of a
“taxable transfer” for gift tax purposes; thus, the $1,500 political donation is not considered a gift.

Bloom’s skill level: Application

Lecture # 5.07

32
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2017 AICPA Released Questions – REG

Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently
retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be
taxed?
A. As a capital gain.
B. As ordinary income.
C. Subject to a 10% penalty.
D. It will not be taxed.

Item ID: 62389

Key: B
REG.CSO.20170401: REG.004.001.000

A. Incorrect. Withdrawals from a traditional IRA are fully taxable as ordinary income (except to the
extent of nondeductible contributions made).

B. Correct! Withdrawals from a traditional IRA are fully taxable as ordinary income (except to the
extent of nondeductible contributions made).

C. Incorrect. Sanderson’s distribution will not be subject to a 10% early distribution penalty since he
was over the age of 59 ½ when the distribution was made.

D. Incorrect. While withdrawals from a Roth IRA would generally not be taxable, withdrawals from a
traditional IRA are fully taxable as ordinary income (except to the extent of nondeductible contributions
made).

Bloom’s skill level: Remembering & Understanding

Lecture # 1.08

33
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2017 AICPA Released Questions – REG

Which of the following would qualify as a deductible charitable contribution in year 1 for an individual
taxpayer?
A. A $200 contribution to the taxpayer's church charged by credit card on December 31, year 1.
B. A $450 contribution to a senator's campaign on December 31, year 1.
C. A $1,000 contribution to a foreign charity on December 31, year 1.
D. A contribution on December 31, year 1, of $500 worth of clothing to the Salvation Army for which
substantiation was not obtained.

Item ID: 64501

Key: A
REG.CSO.20170401: REG.004.003.000

A. Correct! A $200 contribution to the taxpayer's church charged by credit card on December 31,
year 1 would be deductible as a charitable contribution in year 1. Donations (and medical expenses) are
deductible in the year when the credit card is charged, which might not necessarily be the year when the
donor pays the credit card bill. Written substantiation from the donee organization is required for
donations of $250 or more.

B. Incorrect. Political contributions are not deductible.

C. Incorrect. Contributions to foreign charities are not deductible.

D. Incorrect. Written substantiation from the donee organization is required for donations of $250 or
more.

Bloom’s skill level: Application

Lecture # 1.10

34
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2017 AICPA Released Questions – REG

Bartlet owns a manufacturing business and participates in the business. Which of the following conditions
would cause the business to be considered a nonpassive activity for Bartlet?
A. Bartlet participates in the business for more than 500 hours during a year.
B. The business made a profit in any three of the last five years that preceded the current year.
C. The business has at least 10 employees who, individually or collectively, work for the business
more than 1,000 hours in a year.
D. Bartlet files an election with the IRS postponing nonpassive activity classification.

Item ID: 66925

Key: A
REG.CSO.20170401: REG.004.004.000

A. Correct! To be classified as a nonpassive activity for Bartlet, he must materially participate in the
manufacturing business. This determination is made on a yearly basis according to the seven tests for
material participation outlined in Regulation §1.469-5T. One of the seven tests is that the individual
participates in the activity for more than 500 hours during the year.

B. Incorrect. To be classified as a nonpassive activity for Bartlet, he must materially participate in the
manufacturing business. This determination is made on a yearly basis according to the seven tests for
material participation outlined in Regulation §1.469-5T. The fact that the business made a profit in any
three of the last five years would qualify the business as a for-profit activity rather than a “hobby” under
IRC §183.

C. Incorrect. To be classified as a nonpassive activity for Bartlet, he must materially participate in the
manufacturing business. This determination is made on a yearly basis according to the seven tests for
material participation outlined in Regulation §1.469-5T. While the number of employees may have an
affect on this determination, it does not describe Bartlet’s involvement in the business.

D. Incorrect. To be classified as a nonpassive activity for Bartlet, he must materially participate in the
manufacturing business. This determination is made on a yearly basis according to the seven tests for
material participation outlined in Regulation §1.469-5T.

Bloom’s skill level: Remembering & Understanding

Lecture # 1.07

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2017 AICPA Released Questions – REG

Talbot purchased a laptop for $1,500 and a television for $1,300. The laptop is used solely for business
and the television solely for personal entertainment. During the same year, Talbot experienced serious
financial difficulty and sold the television for $300 and the laptop for $1,000. What amount, if any, is
Talbot entitled to deduct as a loss relating to the sale of the television and laptop?
A. $0
B. $500
C. $1,000
D. $1,500

Item ID: 73879

Key: B
REG.CSO.20170401: REG.004.005.000

A. Incorrect. IRC §165(c) provides that the deduction of losses by an individual are generally limited
to (1) losses incurred in a trade or business; (2) losses incurred in a transaction entered into for profit; and
(3) losses of property arising by casualty or theft.

B. Correct! IRC §165(c) provides that the deduction of losses by an individual are generally limited
to (1) losses incurred in a trade or business; (2) losses incurred in a transaction entered into for profit; and
(3) losses of property arising by casualty or theft. Thus, losses on the sale of personal-use assets (e.g.,
the television) by an individual are not deductible. Since the laptop was an asset used solely for
business, Talbot can deduct the $500 loss on the laptop.

C. Incorrect. IRC §165(c) provides that the deduction of losses by an individual are generally limited
to (1) losses incurred in a trade or business; (2) losses incurred in a transaction entered into for profit; and
(3) losses of property arising by casualty or theft.

D. Incorrect. IRC §165(c) provides that the deduction of losses by an individual are generally limited
to (1) losses incurred in a trade or business; (2) losses incurred in a transaction entered into for profit; and
(3) losses of property arising by casualty or theft.

Bloom’s skill level: Application

Lecture # 1.05

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2017 AICPA Released Questions – REG

Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop
had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings,
A. The flower shop must withhold FICA taxes from Juan's earnings.
B. Juan must pay self-employment tax on the earnings of the business.
C. Juan will be exempt from self-employment taxes for the first three years of operations.
D. Juan will be exempt from the Medicare tax because the business earnings are below the
threshold amount.

Item ID: 71309

Key: B
REG.CSO.20170401: REG.005.001.000

A. Incorrect. The flower shop must withhold FICA taxes from employees’ wages. Juan is the
owner/employer; thus, once the business’s earnings are determined on Schedule C, his self-employment
tax is 15.3% (which is equal to the combined amounts of the employer and employee portions of FICA
tax) of such earnings.

B. Correct! Individuals are subject to self-employment taxes on net self-employment income. This
includes all business revenue reduced by all ordinary and necessary business expenses (except
retirement plan contributions on behalf of the taxpayer).

C. Incorrect. There is no such exemption from self-employment taxes. Individuals are subject to self-
employment taxes on net self-employment income. This includes all business revenue reduced by all
ordinary and necessary business expenses (except retirement plan contributions on behalf of the
taxpayer).

D. Incorrect. There is no such exemption from Medicare tax. Individuals are subject to self-
employment taxes on net self-employment income. This includes all business revenue reduced by all
ordinary and necessary business expenses (except retirement plan contributions on behalf of the
taxpayer).

Bloom’s skill level: Remembering & Understanding

Lecture # 1.13

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2017 AICPA Released Questions – REG

When should a corporate taxpayer elect to forgo carryback of a net operating loss and instead carry the
net operating loss forward?
A. When the taxpayer expects net operating losses in the future.
B. When the taxpayer has high marginal tax rates in carryback years and expects to be in lower
marginal rates in the future.
C. When the taxpayer expects lower rates in the future.
D. When the taxpayer has low marginal tax rates in carryback years and expects to be in higher
marginal rates in the future.

Item ID: 61003

Key: D
REG.CSO.20170401: REG.005.003.002

A. Incorrect. It would not be more beneficial to carry a net operating loss (NOL) forward when the
taxpayer expects NOLs in the future since an NOL must be applied to taxable income to be utilized.

B. Incorrect. A corporate taxpayer can make better use of a net operating loss (NOL) by electing to
forgo carryback of the NOL and instead carry the NOL forward when the taxpayer expects to be taxed at
higher marginal rates in the future; that is, the higher the applicable marginal tax rate, the higher the tax
benefit of the deduction.

C. Incorrect. A corporate taxpayer can make better use of a net operating loss (NOL) by electing to
forgo carryback of the NOL and instead carry the NOL forward when the taxpayer expects to be taxed at
higher marginal rates in the future; that is, the higher the applicable marginal tax rate, the higher the tax
benefit of the deduction.

D. Correct! A corporate taxpayer can make better use of a net operating loss (NOL) by electing to
forgo carryback of the NOL and instead carry the NOL forward when the taxpayer expects to be taxed at
higher marginal rates in the future; that is, the higher the applicable marginal tax rate, the higher the tax
benefit of the deduction.

Bloom’s skill level: Remembering & Understanding

Lecture # 2.05

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2017 AICPA Released Questions – REG

A corporation distributed land with a basis of $20,000 and a fair market value of $60,000, but was subject
to a non-recourse liability of $70,000 to its sole shareholder. What amount represents the corporation’s
recognized gain?
A. $20,000
B. $50,000
C. $60,000
D. $70,000

Item ID: 62923

Key: B
REG.CSO.20170401: REG.005.003.003

A. Incorrect. Corporate distributions of property are taxable to the corporation to the extent the fair
market value of the property exceeds the corporation’s basis in the property distributed. Since the liability
distributed to the shareholder exceeds the fair market value, the amount of the liability is treated as if it
were the fair market value of the property.

B. Correct! Corporate distributions of property are taxable to the corporation to the extent the fair
market value of the property exceeds the corporation’s basis in the property distributed. Since the liability
distributed to the shareholder exceeds the fair market value, the amount of the liability is treated as if it
were the fair market value of the property; thus, the corporation must recognize a gain of $50,000 (i.e.,
$70,000 liability/FMV – $20,000 basis).

C. Incorrect. Corporate distributions of property are taxable to the corporation to the extent the fair
market value of the property exceeds the corporation’s basis in the property distributed. Since the liability
distributed to the shareholder exceeds the fair market value, the amount of the liability is treated as if it
were the fair market value of the property.

D. Incorrect. Corporate distributions of property are taxable to the corporation to the extent the fair
market value of the property exceeds the corporation’s basis in the property distributed. Since the liability
distributed to the shareholder exceeds the fair market value, the amount of the liability is treated as if it
were the fair market value of the property.

Bloom’s skill level: Application

Lecture 2.11

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2017 AICPA Released Questions – REG

On January 1 of the first year of operation, an investor paid $10,000 for a 20% interest in Biga, an S
corporation. During the same year, Biga earned $10,000 taxable income and $2,000 tax-exempt interest.
Biga paid dividends totaling $1,000 to its shareholders during the same year. What is the investor’s tax
basis in the shares of Biga at the end of the year?
A. $4,200
B. $10,000
C. $12,200
D. $12,400

Item ID: 61401

Key: C
REG.CSO.20170401: REG.005.004.003

A. Incorrect. An S corporation shareholder calculates basis in the following order: Initial basis +
Income items (including gains and tax-exempt income) – Distributions – Nondeductible, noncapital
expenses and depletion – Items of loss and deduction.

B. Incorrect. An S corporation shareholder calculates basis in the following order: Initial basis +
Income items (including gains and tax-exempt income) – Distributions – Nondeductible, noncapital
expenses and depletion – Items of loss and deduction.

C. Correct! An S corporation shareholder calculates basis in the following order: Initial basis +
Income items (including gains and tax-exempt income) – Distributions – Nondeductible, noncapital
expenses and depletion – Items of loss and deduction. Thus, the investor’s tax basis in the shares of
Biga at the end of the year is $12,200, calculated as follows: $10,000 initial basis + (20% × $10,000
income) + (20% × $2,000 tax-exempt income) – (20% × $1,000 dividends).

D. Incorrect. An S corporation shareholder calculates basis in the following order: Initial basis +
Income items (including gains and tax-exempt income) – Distributions – Nondeductible, noncapital
expenses and depletion – Items of loss and deduction.

Bloom’s skill level: Application

Lecture # 3.01

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2017 AICPA Released Questions – REG

Two partners each own an equal interest in a general partnership. One partner contributes to the
partnership a building that has an adjusted basis of $40,000 and a fair market value of $60,000. The
asset is subject to a mortgage of $30,000, which is assumed by the partnership. What is the contributing
partner's share of liabilities in the partnership?
A. $0
B. $15,000
C. $30,000
D. $40,000

Item ID: 63109

Key: B
REG.CSO.20170401: REG.005.005.005

A. Incorrect. Since the partners each own an equal interest in the general partnership, the
contributing partner will share in half of the mortgage after contribution to the partnership. Note: The
mortgage (typically, a nonrecourse liability) is generally shared by general partners in accordance with
their profits interest percentages. Since the question is silent as to a difference, one must assume that the
partners’ profits interest percentages are equal to their capital interest percentages.

B. Correct! Since the partners each own an equal interest in the general partnership, the
contributing partner will share in half, or $15,000, of the $30,000 mortgage after contribution to the
partnership. Note: The mortgage (typically, a nonrecourse liability) is generally shared by general
partners in accordance with their profits interest percentages. Since the question is silent as to a
difference, one must assume that the partners’ profits interest percentages are equal to their capital
interest percentages.

C. Incorrect. Since the partners each own an equal interest in the general partnership, the
contributing partner will share in half of the mortgage after contribution to the partnership. Note: The
mortgage (typically, a nonrecourse liability) is generally shared by general partners in accordance with
their profits interest percentages. Since the question is silent as to a difference, one must assume that the
partners’ profits interest percentages are equal to their capital interest percentages.

D. Incorrect. Since the partners each own an equal interest in the general partnership, the
contributing partner will share in half of the mortgage after contribution to the partnership. Note: The
mortgage (typically, a nonrecourse liability) is generally shared by general partners in accordance with
their profits interest percentages. Since the question is silent as to a difference, one must assume that the
partners’ profits interest percentages are equal to their capital interest percentages.

Bloom’s skill level: Application

Lecture # 4.02

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2017 AICPA Released Questions – REG

Which of the following items is not normally taken into account in determining distributable net income of
a simple trust?
A. Tax-exempt interest.
B. Fiduciary fee.
C. Taxable interest income.
D. Personal exemption.

Item ID: 73711

Key: D
REG.CSO.20170401: REG.005.007.001

A. Incorrect. Tax-exempt interest is generally added to taxable income in determining distributable

net income (DNI), which is the maximum amount that can be taxed to beneficiaries as income (the rest is
considered a distribution of principal). Note: When calculating DNI for a simple trust, one generally starts
with taxable income and makes adjustments to arrive at DNI. This makes the wording of this question
slightly confusing, which could have contributed to it being released by the AICPA.

B. Incorrect. Fiduciary fees are deductible for both taxable income and distributable net income
(DNI) purposes. DNI is the maximum amount that can be taxed to beneficiaries as income (the rest is
considered a distribution of principal). Note: When calculating DNI for a simple trust, one generally starts
with taxable income and makes adjustments to arrive at DNI. This makes the wording of this question
slightly confusing, which could have contributed to it being released by the AICPA.

C. Incorrect. Taxable interest income is includible for both taxable income and distributable net
income (DNI) purposes. DNI is the maximum amount that can be taxed to beneficiaries as income (the
rest is considered a distribution of principal). Note: When calculating DNI for a simple trust, one generally
starts with taxable income and makes adjustments to arrive at DNI. This makes the wording of this
question slightly confusing, which could have contributed to it being released by the AICPA.

D. Correct! While a personal exemption of $300 is available to a simple trust in calculating taxable
income, no exemption is allowed for purposes of distributable net income (DNI), which is the maximum
amount that can be taxed to beneficiaries as income (the rest is considered a distribution of principal).
Note: When calculating DNI for a simple trust, one generally starts with taxable income and makes
adjustments, including adding back the personal exemption. This makes the wording of this question
slightly confusing, which could have contributed to it being released by the AICPA.

Bloom’s skill level: Remembering & Understanding

Lecture # 5.05

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2017 AICPA Released Questions – REG

A simple trust had $25,000 in capital gains, $10,000 in municipal interest, $5,000 in corporate bond
interest, and $2,000 in accounting and trustee fees. According to the trust agreement, capital gains are to
be distributed to the beneficiary. What is the distributable net income for this trust?
A. $28,000
B. $30,000
C. $38,000
D. $40,000

Item ID: 61061

Key: C
REG.CSO.20170401: REG.005.007.003

A. Incorrect. When calculating distributable net income (DNI)—i.e., the maximum amount that can
be taxed to beneficiaries as income—one generally starts with taxable income and makes the following
adjustments to arrive at DNI: (1) add tax-exempt interest, as it is distributable income even though it is not
taxable; (2) add back the $300 personal exemption, as it is not allowable for purposes of DNI; and
(3) deduct capital gains, which are normally allocated to the corpus of trust rather than income. However,
in this case, taxable income is not given and the capital gains are included in DNI since they are
distributed to the beneficiary.

B. Incorrect. When calculating distributable net income (DNI)—i.e., the maximum amount that can
be taxed to beneficiaries as income—one generally starts with taxable income and makes the following
adjustments to arrive at DNI: (1) add tax-exempt interest, as it is distributable income even though it is not
taxable; (2) add back the $300 personal exemption, as it is not allowable for purposes of DNI; and deduct
capital gains, which are normally allocated to the corpus of trust rather than income. However, in this
case, taxable income is not given and the capital gains are included in DNI since they are distributed to
the beneficiary.

C. Correct! When calculating distributable net income (DNI)—i.e., the maximum amount that can
be taxed to beneficiaries as income—one generally starts with taxable income and makes the following
adjustments to arrive at DNI: (1) add tax-exempt interest, as it is distributable income even though it is not
taxable; (2) add back the $300 personal exemption, as it is not allowable for purposes of DNI; and
(3) deduct capital gains, which are normally allocated to the corpus of trust rather than income. However,
in this case, taxable income is not given and the capital gains are included in DNI since they are
distributed to the beneficiary; thus, DNI is calculated as follows: $25,000 in capital gains + $10,000 in
municipal interest + $5,000 in corporate bond interest – $2,000 in accounting and trustee fees = $38,000.

D. Incorrect. When calculating distributable net income (DNI)— i.e., the maximum amount that can
be taxed to beneficiaries as income—one generally starts with taxable income and makes the following
adjustments to arrive at DNI: (1) add tax-exempt interest, as it is distributable income even though it is not
taxable; (2) add back the $300 personal exemption, as it is not allowable for purposes of DNI; and
(3) deduct capital gains, which are normally allocated to the corpus of trust rather than income. However,
in this case, taxable income is not given and the capital gains are included in DNI since they are
distributed to the beneficiary.

Bloom’s skill level: Application

Lecture # 5.05

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2017 AICPA Released Questions – REG

Task 80877_01 (Debt vs Equity Capitalization)

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2017 AICPA Released Questions – REG

Task 80877_01 (Plan Options)

Explanations

Chen’s after-tax cash flow in year 1

• Plan 1
o Dividend Income: Under Plan 1, Chen will receive a $100,000 dividend, taxable at a
rate of 15%; thus, his after-tax dividend income is 85% of $100,000, or $85,000.
• Plan 2
o Dividend Income: Under Plan 2, Chen will receive $100,000, but $70,000 will be
principal and interest on the loan, and the other $30,000 will be dividend income,
taxable at a rate of 15%; thus, his after-tax cash flow with respect to the dividend
income is 85% of $30,000, or $25,500.
o Interest Income: Under Plan 2, Chen’s total interest income will be $24,000 (i.e., 5%
of the $480,000 balance on the loan in year 1), taxable at his ordinary income tax
rate of 30%; thus, his after-tax cash flow with respect to the interest income is 70% of
the $24,000, or $16,800.
o Loan Principal Repayment: Under Plan 2, Chen will receive $100,000, but $70,000
will be principal and interest on the loan, and the other $30,000 will be dividend
income. Of the $70,000 loan payment, $24,000 (i.e., 5% of the $480,000 balance on

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2017 AICPA Released Questions – REG

the loan in year 1) will be interest income, so the remaining $46,000 of the payment
will reduce the principal of the loan.

ABC Corp’s anticipated taxable income for year 1:

• Plan 1: Since ABC projects taxable income of $200,000 for year 1 and there are no
deductions called for under Plan 1, anticipated taxable income will remain at $200,000.
• Plan 2: Since ABC projects taxable income of $200,000 for year 1 and there are will be a
deduction for the $24,000 of interest paid to Chen on the loan under Plan 2, anticipated
taxable income will be $176,000 (i.e. $200,000 – $24,000).

ABC Corp’s anticipated federal income tax liability for year 1 under Plan 1:

• Plan 1: Since ABC projects taxable income of $200,000 for year 1 with no deductions called
for under Plan 1, the anticipated tax liability will be $200,000 × 35% corporate tax rate, or
$70,000.
• Plan 2: Since ABC projects taxable income of $200,000 less a deduction for the $24,000 of
interest paid under Plan 2, the anticipated tax liability will be $176,000 × 35% corporate tax
rate, or $61,600.

Bloom’s skill level: Application

Lecture # 2.04

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2017 AICPA Released Questions – REG

Task 85550_01

Explanations

Joe’s gift to his wife, Dale:

• Amount subject to gift tax: The gift is not subject to the gift tax since gifts to a spouse
qualify for the marital deduction under IRC §2523.

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2017 AICPA Released Questions – REG

• Gain (loss) recognized: Dale will recognize a gain of $5,700 (i.e., $14,200 proceeds –
$8,500 basis) on the sale of the necklace. Her basis in the necklace is $8,500 since she will
have a carryover basis in the necklace from Joe. Joe received the necklace as an inheritance
so he would have received a stepped-up basis equal to the fair market value of the necklace
in year 1 (i.e., $8,500).

Todd’s gift to Sara:

• Amount subject to gift tax: Gift tax is applied to the fair market value of the gift on the date
of transfer (i.e., $200,000).
• Gain (loss) recognized: Sara’s basis in the gift from Todd includes his $160,000 basis in the
property plus the portion of the gift taxes paid that is attributable to the increase in value over
his basis, calculated as follows: $200,000 FMV on date of gift – $160,000 basis = $40,000
increase in value. $40,000 increase/$200,000 FMV = 20% × $66,600 gift tax paid = $13,320
applicable portion of gift tax + Todd’s $160,000 basis = $173,320 for Sara’s basis. Since Sara
sold the property for $250,000 later in year 2, Sara would have a gain of $76,680 (i.e.,
$250,000 proceeds – Sara’s $173,320 basis).

Ruby’s gift to Mark:

• Amount subject to gift tax: Gift tax is applied to the fair market value of the gift on the date
of transfer (i.e., $90,000).
• Gain (loss) recognized: Since no gift taxes were paid, Ruby’s basis will simply carryover to
Mark. Since Mark sold the property for $115,000 later in year 2, Mark would have a gain of
$35,000 (i.e., $115,000 proceeds – $80,000 basis).

Johann’s gift to Jeff:

• Amount subject to gift tax: Gift tax is applied to the fair market value of the gift on the date
of transfer (i.e., 1,000 shares × $15/share = $15,000).
• Gain (loss) recognized: Since no gift taxes were paid, Johann’s basis (i.e., $22,000, or
$22/share) would simply carryover to Jeff. However, since Jeff sold 400 of the shares for
$13/share later in year 2, Jeff would have a loss. When a loss occurs on the sale of gifted
property, the lower of the FMV on the date of the gift (i.e., $15/share) or the donor’s basis
(i.e., $22/share) must be used to determine the loss; thus, Jeff’s loss is calculated as follows:
($13/share proceeds –$15/share FMV) × 400 shares = $800 loss.

Bloom’s skill level: Application

Lecture # 7.03 and 5.07

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2017 AICPA Released Questions – REG

Task 4021_01

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